Talos Energy, a U.S. oil company focused on the U.S. and the Mexican side of the Gulf of Mexico, has announced further cost cuts, inclusive of $170.0 million of reductions in capital, operating and G&A expenses.
The company said Monday it would continue to evaluate additional opportunities to further reduce 2020 costs. Those reductions would be incremental to the $170.0 million already identified, it said.
"Talos continues to expect to generate positive free cash flow in 2020 despite the current commodity environment. We believe that these cost reduction measures, coupled with Talos's low cash cost structure and robust hedge book, allow the Company to generate free cash flow in 2020, after capital expenditures and interest expense, in the mid-$20's per barrel average WTI prices for the balance of the year," Talos said.
Talos explained that its updated spending guidance reflected investments in infrastructure-led, short-cycle projects that were previously committed to and that are focused on lowering the lifting cost structure of Talos's assets by adding incremental barrels through existing fixed-cost offshore production facilities, resulting in an increased value of the asset base.
High-Margin Low-Break Even
"Given the ability to utilize existing infrastructure, Talos believes these high-margin, low breakeven investments are economic even in the current commodity price environment. Also included in the guidance is a limited, but unchanged, portion of Talos's budget dedicated to the front-end engineering and design ("FEED") work related to our Zama project offshore Mexico, " Talos said.
Production sales volumes for 2020 are expected to be 23.3 – 24.6 million barrels of oil equivalent ("MMBoe"), which represents an average daily production of 63.7 – 67.1 thousand barrels of oil equivalent per day ("MBoe/d"), or approximately a 3.1 MBoe/d (less than 5%) reduction from the original 2020 full-year guidance due to deferred projects.
"Talos continues to maintain its robust hedge book. As of March 23, the Company had approximately 11.9 million barrels of oil hedged for 2020, representing 70% of the mid-point of guided oil volumes, at a weighted average WTI price of $51.53 per barrel," the company said.
President and Chief Executive Officer Timothy S. Duncan commented, "I believe Talos is well-positioned to successfully navigate the current environment. We have taken immediate and decisive steps to defer certain investments and this updated guidance delivers continued free cash flow generation in a volatile commodity market environment while maintaining abundant collateral value and access to substantial liquidity.
"We expect to continue to invest in our infrastructure-led short-cycled developments while staying focused on moving Zama forward towards a final investment decision. We believe our 2020 updated capital program will be self-funded in the mid-$20's per barrel of WTI."
More cuts might come
Duncan added, "Talos's updated 2020 capital expenditures guidance represents approximately a 34% reduction from the 2019 investments in the same asset base, pro forma for the acquisition we closed in February, while maintaining our focus on safety, meeting our P&A obligations and continuing investments in asset management projects.
"With these capital reductions plus reductions in operating and G&A expenses, we believe we can continue to generate free cash flow in the current environment. The projects we will retain for the year are those previously committed to, and those that will bolster the stability of our asset base by lowering our lifting costs structure on a per barrel basis. We have already identified the $170.0 million that we are announcing today, and we will continue to look for additional opportunities to further reduce costs.
"These are not the only spending reduction and costs savings we expect in 2020. We also expect the costs associated with certain services to come down throughout the year, but we are not counting on or including such cost reductions in these assumptions."
Duncan said:"We entered this crisis with a track record of consistently generating free cash flow, approximately $600.0 million of liquidity and low leverage, so I firmly believe Talos will not only weather this storm, but will be positioned to be nimble and opportunistic when the market has recovered. I am confident in the long-term outlook for Talos.
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